Over the past years, China’s traffic demand was strong, but the supply of civil aviation capability was weak. Air passenger traffic totaled 549 million in 2017. Domestic passenger traffic was massive, while traffic on international routes accounted for only 11 percent. Chinese low-cost carriers (LCCs) contributed little, making up only 7- to 8 percent of the domestic market, which was underserved. Currently, China hosts 10 LCCs with an overall fleet of 320 aircraft, 10 percent of the national total. The largest carriers are Spring Airlines and Beijing Capital Airlines.
Industry analysts suggest that China needs to strengthen aviation supply-side structural reform. Developing low-cost aviation in the central and western regions to promote the reform becomes a priority. In these vast regions, there are few airports. The route network is imperfect, especially in the remote areas of the west, and economic development is lagging. Although there are fewer airports in the eastern region, they handle most of the traffic. Moreover, main international corridors of China’s Belt and Road Initiative start from these vast regions.
China’s available airspace area is 9.6 million square kilometers, but airspace available for civil aviation is limited to 3.1 million square kilometers, only 32 percent. Low-cost carriers’ daily aircraft utilization rate averages 11-12 hours, which is 20 percent higher than legacy airlines and highlights the level of demand.
The Chinese government is investing heavily in dozens of new regional airports across the country as many small and medium-size cities are more suitable for developing low-cost airlines. Introducing the LCCs to these new airports can increase their efficiency.
Budget carriers compete with each other through pricing strategy. For instance, Spring Airlines, serving 130 routes with 80 airplanes, offers a promo fare equivalent to $15.50 for its Shanghai-Bangkok route. All of the LCCs target the growing middle class, estimated at 200 million people. Also, they face tough competition from the full-service airlines, as their “reconciliation” strategy captures the market share of budget carriers by imitating low-cost operating models, optimizing fleets, streamlining revenue management, and modifying services. In the field of medium and short-haul routes, legacy airlines and low-cost carriers have grown more similar.
There are several other challenges. A planned local high-speed rail network can hinder airline growth. As the high-speed rail travels at 350 km/h (218 mph), it is expected that air transportation between the second and third tier cities within 1,200 km will be squeezed out.
Underserving aviation resources in the government's promotional programs and allocation process has caused the operating cost of low-cost airlines to be higher. Low-cost operating models count on industry management organizations providing more recognition and differentiation of service standards. On the positive side, Chinese millennials’ acceptance of low-cost aviation services is expanding the market gradually, as they replace the older generation. But the existing planned pricing management system for local air transport services conflicts with the demand for marketing innovation.
Under these circumstances, these carriers look toward joint domestic and international cooperation to promote the sub-segment and protect their interests. For example, Wang Yu, chairman of Spring Airlines, has expressed his willingness to explore partnerships with foreign airlines and others.